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Would you like a car with those fries?

Bloomberg ran a report last week on electric cars that turned into a longer read than I expected as I chased through some of their numbers that seemed wrong:

It’s been 10 years since Apple Inc. unleashed a surge of innovation that upended the mobile phone industry. Electric cars, with a little help from ride-hailing and self-driving technology, could be about to pull the same trick on Big Oil.

I think this chart is dead wrong. I don’t know when EV sales will take off, but when they do they won’t take 20 years to hit 50% penetration, they will be lucky to take 5 years – once new technology takes off, it takes off quickly (click for full chart):

The question to me is whether the curve hits the steep part in 2020 or 2030, that is what is going to be the key determinant about whether to invest in cars and whether to go short oil.

With a number of countries already mandating electric cars from a point 15-30 years from now, regulation will be helping to accelerate electric vehicle take up.

Then the Bloomberg article looked at the cost of driving:

The total cost of ownership of electric and oil-fueled vehicles will reach parity in 2020 for shared-mobility fleets, five years earlier than for individually-owned vehicles, according to Bloomberg New Energy Finance.

The 2020 matches my numbers from earlier this year (see this post)– I was comparing how much you save in petrol to the cost of the battery and came to a similar conclusion – although by my numbers individually owned cars will take longer to reach parity:

However, the next chart had me stumped:

Are maintenance costs really the largest cost in owning a car? And why do they have depreciation lower for an oil-fueled car when the electric car has an extra $10k of battery to depreciate?

So I went and got the RethinkX report – which has a number of good data points, but clearly has the rose coloured glasses firmly in place. The reason the above chart looks so good is that it has some heroic assumptions: basically RethinkX assume that electric vehicles last for 800,000km vs 320,000km for petrol powered, maintenance costs are 80% lower, and insurance 90% lower.

Maybe RethinkX will be right, but I’m not expecting many companies to factor such massive gains into their business plans. I’m still thinking the mid 2020’s is more likely.

I hadn’t seen the Tesloop case study before:

Box 5: Tesloop case study

Tesloop is a California-based company offering a low-cost alternative to both short-haul aviation and long-distance drives. It currently operates a number of routes around Southern California (e.g., LA to Palm Springs, Las Vegas, etc.), offering door-to-door and pickup-point-based ride sharing service using Tesla cars. Tesloop is utilizing these cars for more than 17,000 miles per month — a level unprecedented for passenger vehicles — and that is expected to rise to 25,000, running or charging them almost 20 hours per day.

Tesloop’s early data indicates that mainstream assumptions significantly underestimate vehicle lifetime miles and overestimate maintenance and other operating costs-per-mile.

Key highlights: More vehicle lifetime miles, lower operating costs

Vehicle lifetime miles. Tesloop’s first vehicle (Tesla S) is now 20 months old and has clocked over 280,000 miles. It reached 200,000 miles with only 6-7% battery degradation.

Tesloop’s two other vehicles have reached 100,000 miles with degradation of only 7-9%. This is with a very aggressive charge cycle, which CEO Rahul Sonnad describes as “maybe the worst possible behavior patterns given the current battery chemistry optimizations.”

Sonnad expects that these vehicles could easily stay in service for 5 years at 25,000 miles per month — equating to 1.5 million highway miles.

The drivetrain and battery are expected to outlast other elements in the vehicle, which may need refurbishment. The current ranges of Model S and Model X vehicles would allow a company such as Tesloop to provide point-to-point (Pre-TaaS) service between Boston and New York City, Austin and Dallas/Fort Worth, or Nashville and Memphis.

Maintenance costs. The cost of tires dominates maintenance costs. Other costs incurred relate to failures in areas such as air conditioning and door handles.

As incentives for the manufacturers change toward long-life design, these costs are expected to be minimized, and there is a clear trajectory of lower maintenance in newer vehicles of the same model.

Cost-per-mile. Including maintenance, fuel, insurance, depreciation and finance costs, but excluding driver cost, Tesloop’s current cost per vehicle mile is 20 to 25 cents per mile in a Tesla Model S.

I thought this was interesting – and gives some weight to the optimistic assessment of miles travelled and costs above. On the flip side, we are talking about 3 cars. And the one that had driven the most had a battery replacement at 200,000 miles. So, hardly statistically significant.

Here are my numbers on driverless taxis:

Car hire companies are happy to rent a car to users for $60 a day with about a 75% utilisation rate = $45 a day to the car company. Let’s call that the capital cost for a car.

Now let’s add a third to the cost to cover the battery and the driverless technology – puts us back at $60 per day.

Given its driverless, it can operate for 24 hours a day – but call it 15 hours to take into account time to charge the battery, cleaning, slow periods, servicing and to make the math easier.

So, the car owner needs to make $4 per hour to make a return.

Assuming 1.5 trips per hour (roughly the average), add in electricity costs, 10% to the booking company and about $3.00 per trip is the end cost to the user.

It is pretty compelling. Basically, a driverless taxi would be cost competitive with public transport. Having said that, a driverless bus could mean that public transport also gets much cheaper. And driverless buses will be much easier to program – set path, usually in a city that can be easily mapped.

Current Portfolio

Given the conclusions from earlier in the year about electric car take up, and given that car manufacturers and suppliers are dirt cheap, we have a number of these stocks in MB Fund portfolios.

Performance to date has been good – GM, Peugeot, Magna International, Delphi and Linamar are all up 10%+ in the last 2 months.

We are looking closely at the sector and whether we lighten the exposure.

Hidden gem in the RethinkX footnotes:

There are many potential new business opportunities that might be unleashed by low cost transport. We use “Starbucks on wheels” as an example. If cost per passenger mile drops to 2-3c by 2030, the economics of running a ‘Starbucks on wheels’ on popular routes might become hugely favorable compared to the cost of the real estate investment needed in city-center stores. If a 20-seater vehicle costing 2 cents per passenger mile covered 100,000 miles per year, the cost of the vehicle would be $40,000 per year, substantially less than the equivalent rent on a store. A Starbucks van could operate on popular routes, subsidizing travel costs through the sale of food and beverage. As autonomous technology begins processing costumer data sources, such as social media, marketing and e-commerce could also become potential venues for revenue generation.

Given Australians seem to have roundly rejected Starbucks as selling coffee flavoured hot milk, we will have to bring on the Macca’s bus… free trip to work with every McValue meal!

Damien Klassen is Head of Investments at the MB Fund and Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.

I don’t know when EV sales will take off, but when they do they won’t take 20 years to hit 50% penetration, they will be lucky to take 5 years – once new technology takes off, it takes off quickly (click for full chart)

This comes from total non-understanding of technology. Electric cars are not phones (just a miniaturization of something existing) but rather fundamental shift. Without fundamental breakthrough in battery technology electric cars will never reach 50%

I remember a time where Americans, and it follows Australians, assumed that the future was emails and pcs whilst in east Asia, Korea, HK etc, everyone was into texting and smart(ish) phones. Then Mr Apple realised that all his east Asian tech suppliers were heading in a novel direction and the Americans “invented” the smart phone. Yeah sure smart phones are a logical progression from the old house-brick mobile phones but the revolution was with the switch by the yanks from email / pc to texting / smartphone, and that was virtually overnight. GM has just announced that it “believes in an all-electric future”. Looks like they are now ready to invent the EV.

The crucial question for the American automaker will be how, exactly, to make money from all these cars. By one report, GM loses $9,000 on each Chevy Bolt it sells.
Reuss’ strategy hinges on bringing costs down thanks to steadily dropping battery prices, more efficient motors, and lighter cars. Massive scale and global supply chains helps, too.
“This next generation will be profitable,” he says. “End of story.”
WW. when housing collapses, everthing will stall
Everything.

Damien comment still makes sense. There is lot of r&d going on in developing new battery systems and ways to turn heat into electricity that allows cars to recharge while driving or being parked on the sun. Once new technology kicks in that will increase battery capacity by 3 fold from current levels and allow for very fast charging, game’s over for fossil fuel cars. I can see industrial machinery and trucks still using fossil for foreseeable future but passenger cars will move to electric very rapidly.
What materials will be used in these future battery systems and solar panels is the hard one to guess –
from investment perspective. Everybody is betting in Lithium while some say Zinc may make comeback and nobody knows what materials big and small research companies are experimenting with in their labs.

Without fundamental breakthrough in battery technology electric cars will never reach 50%

Why ? The majority of passenger vehicles would not come close to exceeding the 150-200km range of a typical contemporary electric vehicle in a day.

For city dwellers using their cars almost entirely for commuting and travel within the city, electric cars are a drop-in replacement today.

I’d argue the biggest reason electric vehicles won’t take off at the rate some predict is simply cost. The average vehicle age in most of the western world is ten years (give or take a year) and has been for decades.

Also, It seems hard to argue that electric cars are more of a fundamental shift than smartphones. The former is just a drivetrain replacement. The latter is a massive increase in capability. We are probably only a couple of years away from high-end mobile phones replacing laptops for the “road warriors”.

The smart phone from a technological perspective was pretty much finished by 1992 when IBM introduced the Simon. Of course, their marketing was awful, so it took a few more goes before Apple became the first company in the Anglosphere (but not the world) to successfully market a similar phone, arguably benefitting from a market that had been softened up for the idea considerably by the widespread adoption of the Blackberry.

the “invention” of smartphone was a matter of inventing the idea (technology to make a good smartphone was already there). With electric cars, situation is inverse. Idea has been around for hundreds of years but technology is a bit that is missing. Electric cars are great idea and electric motors are ideal for car power-train. But despite this great idea, current electric cars are just expensive toys, and they are not expensive and toyish for any other reason but sucky technology. Batteries that we have at the moment are crap: heavy, expensive, short lived, need huge energy to be built (almost 30% of total “energy throughput”), environmentally disastrous, unreliable, dangerous.
ICE cars are totally opposite, crappy power train, inefficient, loud, polluting, bad performance, … but have good energy storage. How many battery packs does an electric car needs to last 200k miles?

It’s amazing how it became normal to think that what we need is a great idea (electric car idea) and than we’ll just throw enough money into R&D and things will happen – we just need great “genius” of Steve Jobs and than he pays peanuts some nerdy guy like Wozniak to make the idea to happen. What is they don’t? What if there is a fundamental technical problem that cannot be solved? What is batteries never get much better?

Hate to be the one to burst your bubble but cars are first and foremost Veblen/positional goods, so you’re wasting your time doing a rational Homo-economicus style analysis of of a decision tree that contains primarily soft decision branches which we must deftly navigate to maintain our social position.
There’s a lot more to this equation than just the dollars and cents of transporting flabby middle age men.

I think this chart is dead wrong. I don’t know when EV sales will take off, but when they do they won’t take 20 years to hit 50% penetration, they will be lucky to take 5 years – once new technology takes off, it takes off quickly (click for full chart):

The average vehicle age in most of the western world is ten years (give or take a year) and has been for a VERY long time. How is everyone going to be able to afford to halve their vehicle turnover rate basically overnight ?

Electric cars are not really a fundamentally game changing technology like, say, refrigerators, washing machines or TVs. Hard to see why they’d have a similarly short takeup.

Also, from that Tesloop case study:
“Tesloop is utilizing these cars for more than 17,000 miles per month — a level unprecedented for passenger vehicles — and that is expected to rise to 25,000, running or charging them almost 20 hours per day.”

I don’t know about “unprecedented”. Taxis in the NT cover on average 270,000km/yr, or 14,000 miles per month. It’s not 17,000, but it’s in the ballpark. I’d struggle to believe there aren’t places in the US where taxis and courier vehicles are hitting similar mileages.

If (as Damien suggests) a driverless taxi would be cost competitive with public transport, why would you assume most car purchases will still be made by households? The ‘everyone’ affording could be companies buying fleets of autonomous electric vehicles.

Using a combination of public transport and taxis everywhere today would already be cheaper than owning a vehicle for most people living in major cities, and taxis aren’t expensive because of the driver.

People will want to own driverless cars in the future for the same reason they want to own cars today. Convenience (you’ll still have to wait for your driverless taxi to arrive), fitness for purpose (kids, sports equipment, towing, camping), comfort (owners and passengers won’t treat driverless taxis any better than they treat regular taxis), status (look at me, I have an expensive car !), etc.

The end of the personal vehicle, IMHO, will be more a generational thing rather than a capabilities thing. After all, a driverless car you don’t own is functionally no different to a taxi, and taxis haven’t displaced private cars outside of dense city areas despite having been around as long.

taxis haven’t displaced private cars outside of dense city areas despite having been around as long.

Taxis have arguably been around longer than private cars, in the form of horsedrawn cabs, which were widespread prior to the automobile when owning a horse and buggy was very expensive.
When the Model T Ford ushered in widespread private transportation, it was seen as a massive step forward. It is extremely weird that now the idea of eliminating private transportation is being seen as a sign of progress rather than a huge step backwards.

I now have almost 3 years experience of driving a Tesla Model S in Australia and can tell you that I have had only one issue related to charging/range in that time. Most of my driving is city driving, but so is most of everyone else’s. Every now and then I go for a drive of several hundred km and the time it takes to have something to eat and go to the toilet is enough charging time to carry on to my destination. It will only get faster and easier from here. Tesla’s superchargers currently provide about 120kW of charging power. Elon Musk has teased at a more powerful next-generation of superchargers with at least triple that power.

I have spent far less time waiting for my vehicle to charge over the last 3 years than I would have spent filling it with petrol! The only issues left for widespread adoption are cost and charging infrastructure roll-out and those are just a matter of time. I haven’t noticed any change in my battery performance from when I first got it (30000 km so far).

And for those wondering about my one charging issue: I parked in a supercharger bay that wasn’t working and came back to the car to find it uncharged. I had to move it to another bay where it started charging straight away. I needed a particularly big charge on that occasion so was held up by about 40 minutes. Annoying, but not a disaster.

MB Fund

* Inception returns are per annum. The above returns include trading and investment costs but not administration fees. Note individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. Past performance is not an indication of future performance.